ST Engineering - RHB Invest 2019-10-14: Growing Presence In Satcom Business; BUY


ST Engineering - Growing Presence In Satcom Business; BUY

  • Reiterate BUY with SGD4.70 Target Price, 17% upside plus c.4% yield.
  • We came back feeling positive about ST ENGINEERING (SGX:S63)’s outlook after last Friday’s briefing on the future trends of its satcom business and recent acquisitions.
  • ST Engineering recently acquired Glowlink and completed the Newtec acquisition, which are expected to contribute positively to this segment’s growth. In addition to earnings contribution from its record high outstanding orderbook, we expect these acquisitions and MRAS to drive 10% earnings CAGR for 2018-2021F.

STE focuses on ground equipment in satcom business.

  • ST Engineering’s satellite communication (satcom) business involves the supply of ground equipment and provision of system integration services. Post-acquisition of Newtec, it now has a presence across all key segments of satcom business, with a sizeable market share in the broadcast and aviation markets.
  • While the enterprise market is the largest in value terms, the aviation and marine markets are expected to witness the highest growth (15-20%) over the next few years.

Key differentiating factor and growth drivers.

  • ST Engineering’s proprietary solutions for satcom ground equipment – which it feels is superior to that of its competition – along with its ability to work with the smallest of customers and help them rapidly scale up operations and high switching costs for customers once the satcom solution is deployed, makes ST Engineering confident of building a strong presence in this segment.
  • The rapid deployment of low earth orbit satellite constellations – which will further drive down the costs of satcom bandwidth, and the likely convergence between satcom and upcoming 5G networks – is expected to drive rapid growth in demand for satcom ground equipment and terminals.

Contributions from acquisitions, a key growth catalyst.

  • The Middle River Aerostructure Systems (MRAS) acquisition, completed in April, is expected to be earnings accretive despite integration costs. ST Engineering acquired Glowlink for USD20m in Sep 2019 and completed the Newtec acquisition on 1 Oct 2019. We expect Newtec to start contributing to earnings from FY20F.

Strong orderbook and revenue visibility.

  • ST Engineering reported an all-time high outstanding orderbook of SGD15.6bn, which provides revenue visibility of c.2.5 years. Including the SGD1bn contract for the design and construction of the first Polar Security Cutter, ST Engineering has reported order wins worth SGD4.6bn in 1H19 vs reported order wins worth SGD5.2bn in 2018.

Reiterate BUY.

  • We value ST Engineering on blended valuations, which is an average of P/E, P/BV, EV/EBITDA and DCF.
  • Post decline from its recent peak, ST Engineering’s share price is trading at 19x FY20F P/E, below its historical average.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-10-14
SGX Stock Analyst Report BUY MAINTAIN BUY 4.700 SAME 4.700